[davelj]

[quote=CA renter]

One more note. I’m not sure people understand how most public pension funds work, or how they are “guaranteed.” The pensions are NOT funded directly by tax dollars….

Most people don’t even understand that “taxpayers” do not directly fund pension benefits.[/quote]

This is 100% incorrect. Yes, the employees contribute to the pension fund but the “employer” in these arrangements is… the taxpayer.

To use a specific example, in 2011 San Diego County’s pension fund received $322 million in “employer contributions” (the employer is the County which is funded by tax receipts) and another $44 million in employee contributions.

[See for yourself: http://sdcera.org/CAFR/cafr_2011.pdf%5D

So, here in San Diego – and in the vast majority of other US municipalities – taxpayers absolutely DIRECTLY fund pension benefits.

I’m somewhat baffled that you don’t know this.

[davelj]

I don’t know if it’s “probable” that our existence is a simulation (as the article suggests), but it’s probably the highest probability among many alternatives, which is a distinction with a difference. My personal assumption is that some “thing” beyond what our simple minds can fathom created our universe and we’re an observed experiment. But that this “thing” gives one rat’s ass about us as individuals or even large groups… that I do not believe.

[davelj]

[quote=CA renter][quote=davelj][quote=livinincali]
Deferred compensation is a stupid arrangement. If you can’t pay enough right now to attract qualified people to the position then we can live without the service.[/quote]

Agreed. This is the root of much financial evil.

The average human is undisciplined and procrastinates. So s/he will not sufficiently save for retirement. It’s basic human nature.

So, under a fixed pension scheme, we take monies from folks who can’t and don’t save sufficiently for themselves and… add ANOTHER layer of procrastination in the form of a… a pension board that oversees the pension. This board is typically largely comprised of politicians and union reps for whom “kicking the can down the road” is the expedient course of action.

So, we double-down, in effect, on the procrastination element in these fixed pension schemes… and here we are – WAY underfunded.

If you look at it through the lens of human nature, it all makes sense. The trick, of course, is to not set these schemes up to fail in the first place… by not guaranteeing retirement benefits in the first place.[/quote]

Great. Let’s start with those who can most afford to lose their DB pensions and retiree healthcare benefits: executives.[/quote]

For solvent pension plans executive retiree benefits are irrelevant – everyone’s getting paid. The problem is with insolvent plans, in which executives (and everyone else) are limited to $60K annually by the PBGC, and public plans, in which there’s no distinction made between executives and everyone else. So, since we have a limit on insolvent plans of $60K/year, I’d be happy to apply that to public plans as well, since they’re mostly insolvent as well (although on one wants to cry Uncle just yet).

So, if you want to define “executive” as anyone due more than $60K annually in either a public or an insolvent private plan, I’m in total agreement.

[davelj]

[quote=livinincali]
Deferred compensation is a stupid arrangement. If you can’t pay enough right now to attract qualified people to the position then we can live without the service.[/quote]

Agreed. This is the root of much financial evil.

The average human is undisciplined and procrastinates. So s/he will not sufficiently save for retirement. It’s basic human nature.

So, under a fixed pension scheme, we take monies from folks who can’t and don’t save sufficiently for themselves and… add ANOTHER layer of procrastination in the form of a… a pension board that oversees the pension. This board is typically largely comprised of politicians and union reps for whom “kicking the can down the road” is the expedient course of action.

So, we double-down, in effect, on the procrastination element in these fixed pension schemes… and here we are – WAY underfunded.

If you look at it through the lens of human nature, it all makes sense. The trick, of course, is to not set these schemes up to fail in the first place… by not guaranteeing retirement benefits in the first place.

[davelj]

[quote=CA renter]

“The challenge is quite simply recruitment of people who are willing to take the time to get the certification it takes to be a firefighter today,” said Michael Hunt, chief of the Clearwater Volunteer Fire Department in Beech Island, S.C., an Aiken County township of about 4,000 people.
[/quote]

All true – including the points from your post above – but… clearly there are still a reasonable number of folks who want to be part-time volunteer fire fighters. Yes, all of the limitations you note apply. But that doesn’t mean that we couldn’t integrate some small percentage – say to reach a goal of 15%-20% of the total over a decade or two – into our current workforce. The reason this doesn’t happen is simple: the unions won’t stand for it, as it diminishes their power.

And therein lies the problem. We have budget and pension issues that could be largely solved at the margin (where everything important happens) by increasing – not substituting with – a volunteer component. The unions, however, won’t have it – they’re all or nothing. And that does not seem to me to be a reasonable position.

I’m not anti-union, per se. But, wowsers, these unions take some outrageously unreasonable positions that are real head scratchers. And the total and complete opposition to integrating any volunteers into anything is one of them. Great for the union reps, not so great for everyone else.

[davelj]

A side thought experiment on the topic of public unions.

As has been discussed before, the vast majority of metro areas in the US are serviced by volunteer fire departments (these tend to be small markets, but they are numerous). However, virtually ALL of the major metro markets (not a lot of markets – by definition – but lots of population) are serviced by a full-time, paid fire department.

Clearly, there are lots and lots of folks who would be happy to volunteer to help out the fire department, even here in SD. They’d go through the training, etc etc… and work essentially for free.

If the unions were amenable, we could start integrating such folks into the current fire department and have them working for and alongside the full-time folks. Over time we could strike a balance between volunteer and full-time workers that better fits our financial wherewithal.

So, why doesn’t this happen? I know the answer but I’m wondering what others think is the barrier.

[davelj]

[quote=CA renter]
Big difference: the PBGC is a public *insurance* entity for *private* pension plans, and they have little control over these pension funds (especially before the Pension Protection Act of 2006), whereas the state and local pension funds are NOT insurance funds for pensions; they are the pension funds themselves, and have more control over the types of investments and contribution requirements for covered pensions.
[/quote]

Which is why I specifically stated “it’s not an apples-to-apples comparison.”

California’s state constitution is its own beast but – and I quote Gene Fama here – “Most state constitutions provide that the state first has to service its debt, then make its pension payments, then pay for services. What remains to be seen is whether this order will be enforced when – not if – a state declares bankruptcy.”

Interesting times…

[davelj]

[quote=CA renter]In bankruptcy, employee compensation is a priority claim. These pension contributions are a part of employee compensation.
[/quote]

Whether or not pension contributions are “part of employee compensation” is up for debate. Certainly, the *employee* contribution portion of the total contribution is probably sacrosanct. But the status of the *employer* contribution portion is what judges will be deciding.

Recall that when a corporation goes bankrupt and its pensions are taken over the the Pension Benefit Guaranty Corporation that the maximum pension benefit guaranteed by PBGC is ~$56K annually. Benefits above that level are lost – and constitute a haircut to the pension fund – just like the haircut that the bondholders take. So, while it’s not an apples-to-apples comparison, there is precedent in the corporate world for pensions taking a haircut in bankruptcy.

My point is that it remains to be seen what happens to public pensions in bankruptcy. I suspect they will be cut back but that most or all of the cutbacks will occur for those with large pensions, just as in the case of the PBGC.

You make it sound like this issue is settled. I can assure that it’s not. Not by a long shot.

[davelj]

[quote=Allan from Fallbrook][quote=davelj][quote=spdrun]

I personally don’t use the term “dude”,…[/quote]

Personally, I only use the term dude in the context of its full phraseology: Dude von Dudenstein.

Much as I’m not a fan of “bro” but rather like “Broseph.”[/quote]

Dave: I actually think you’ve erred and are not using the full phraseology, as you’ve omitted the honorific “Baron”, as in Baron Dude von Dudenstein.

If you’re going to do it, do it right.[/quote]

Good point. Duly noted. Forthwith I shall cease to soil the good Dudenstein name!!

[davelj]

[quote=spdrun]

I personally don’t use the term “dude”,…[/quote]

Personally, I only use the term dude in the context of its full phraseology: Dude von Dudenstein.

Much as I’m not a fan of “bro” but rather like “Broseph.”

[davelj]

The companion article to this one is titled “Not Playing the Lottery is for Suckers,” in which lottery winners are interviewed regarding the obviously sound financial strategy of playing the lottery.

One of my pet peeves is when folks try to attain wisdom that they feel should apply to their own lives by listening to folks who have beaten the odds in some endeavor. In fact, it’s probably more valuable to listen to the volumes of folks who applied the same strategy as the “winners” but failed.

I’m no pro-expensive college guy, but Nassim Taleb would have a field day with this article.

[davelj]

Bass’s logic is compelling. The problem, of course, is always timing. We’ll get that inflation at some point… but it could still be several to many years off (see Japan, which he spends some time on – folks have been trying to make money shorting Japanese bonds for over a decade). Bass’s investors will give him a long rope because he’s made folks a crapload of dough with some well-timed calls. But most folks don’t have a decade – which is a possibility – to be proven right. I know I don’t.

It’s a strange financial world…

[davelj]

[quote=livinincali][quote=davelj]
Yes, debt has been growing at a much faster rate than GDP, so we know that it has had a positive impact on GDP (in the past). Now we’re at the point where debt is so large that it has a negative impact on GDP (too much to service). We have too much debt – there’s no question about that. But… you’re dramatically overstating your case when you suggest that there hasn’t been ANY economic growth ex-debt over the last 30 years; this is empirically incorrect. In fact, there’s been a bit of research done on this subject and most of it concludes that about 50-100 bps of annual GDP growth over the last 30 years has been the result of incremental debt.[/quote]

Fair enough. If you take on a trillion dollars of debt to produce 300 billion of annual production it theoretically does end up producing a positive return at some point. It’s just difficult to see it when you keep increasing debt every year in excessive of the incremental productivity increases. I suppose in our system we should measure yearly servicing cost versus the GDP growth. I.e. 1.2 trillion @ 4% is right around 70 billion in servicing costs for 30 years. We get about 280 billion in what we assume is permanent growth from that debt.

Certainly in a world with a growing population and growing energy usage there is growth. It’s just that we chose to measure it something that has a variable meaning. A dollar today in terms of productive output is different than a dollar 2 years ago.[/quote]

I’d have to really think about how to measure the utility of each incremental dollar of debt. That’s probably not an easy thing to do because the cost of capital issue looms large and is difficult to quantify. I think we have too much debt and it seems self-evident because if you normalized interest rates, debt service would be a huge issue. But so long as rates remain low, to paraphrase Chuck Prince, “Everyone keeps dancing.”

[davelj]

[quote=dumbrenter][quote=davelj]
Yes, debt has been growing at a much faster rate than GDP, so we know that it has had a positive impact on GDP (in the past). Now we’re at the point where debt is so large that it has a negative impact on GDP (too much to service). We have too much debt – there’s no question about that. But… you’re dramatically overstating your case when you suggest that there hasn’t been ANY economic growth ex-debt over the last 30 years; this is empirically incorrect. In fact, there’s been a bit of research done on this subject and most of it concludes that about 50-100 bps of annual GDP growth over the last 30 years has been the result of incremental debt.[/quote]

Would it be correct to say that the debt service payments will be a short-term liability (i.e. in current portion of liability) while the same debt used productively will be having a positive effect on the revenue portion of the income statement?[/quote]

This is an interesting issue and it’s complicated by politics and the fact that our economy isn’t a corporation, although they share certain similarities. A traditional view of corporate finance suggests that you issue debt and invest in projects so long as the new projects’ expected rate of return is greater than the weighted-average cost of capital (weighting both debt and equity). As debt increases, the individual costs of both equity and debt increase (as the whole enterprise becomes more risky), but the weighted-average cost declines (because debt is cheaper than equity) UP TO A POINT. At a point – and this varies by company – the overall cost of capital starts to increase with each unit of additional debt – this is, in theory, where the “optimal capital structure” lies. To use extreme examples, the optimal debt-to-capital ratio for a tech start-up is zero (as it’s a very risky enterprise). Conversely, the optimal debt-to-capital ratio for a utility is fairly high, as its cash flows are highly predictable.

Which brings us to the US. Aggregate debt, in and of itself, is not a bad thing. And the US doesn’t have a “true” cost of capital because it’s not a corporation (the Federal Reserve can print money, after all). Arguably, however, at the point at which $1 of incremental debt no longer produces $1 of incremental GDP… well, you need to start asking some hard questions. Perhaps that $1 of debt will pay off in the longer term. For example, a corporation doesn’t issue $1 of debt assuming it’s going to generate a like $1 of earnings in year 1 – that’s absurd. But over time… it needs to generate something positive. The problem that we face now, of course, is that $1 of new debt generates about $0.15 of incremental GDP. While I don’t know what the optimal capital structure is for the US (I’d have to really think about that), it’s not what we have currently – we’re over-leveraged. The only reason we can service our debt right now (and for the foreseeable future) is that Mr. Bernanke has fixed interest rates at a very low level.

So, in a corporate context, it’s much easier to determine whether or not an enterprise is over-leveraged. It’s much more difficult when you look at an economy. But I think when you look at the mountain of debt we have today relative to GDP it’s pretty clear we have a problem. The debate is whether it’s a painful, albeit surmountable, problem over the long term or completely insurmountable. The jury’s still out on that question.

[davelj]

[quote=livinincali][quote=davelj]
Well, not exactly. Roughly 1/3 of the annual growth over the last 30 years has been a result of debt accumulation. The problem, of course, is that if you keep building up debt at small incremental rates over a long period of time – say three decades – you eventually find yourself over-leveraged. As Dickens pointed out, “Annual income £20, annual expenditure £19 and six pence, result happiness. Annual income £20, annual expenditure 20 and six pence, result misery.”

It’s not that all of the growth has been fantasy… it’s just that a very small part of it has been fantasy over a long period of time such that now the cost of servicing that fantasy (resulting from prior debt) is (finally) dragging down our ability to grow.[/quote]

Maybe I’m just arguing semantics, or maybe we’re looking at different data sources but this is what I see. In 1980 the total outstanding debt was right around 5 trillion dollars, this includes public and private debt (Look up the Fed z1 for 1980). That total is now right around 55 trillion. Essentially > 10 fold increase in total debt.

The nominal GDP in 1980 was 2.788 trillion. Today’s it’s around 14.5 trillion. So the economy grew about 5 times in that same period. What I don’t see is any real GDP growth in excessive of debt. In essence we don’t have any example of total debt producing a positive return on investment as a whole. Certainly there are successful businesses that took on debt and produced a real rate of return, but in aggregate there’s been more failures than successes.

If there was real growth in excess of debt then we should be looking at an economy where GDP is well over 30 trillion.[/quote]

Nope, you’re not arguing semantics – it appears that the difference between an income statement and a balance sheet is eluding you.

But before I get to that, as I’ve explained many times here, the Fed’s measure of total debt is calculated incorrectly by any rational person’s way of thinking. That is, it includes securitized debt, which double-counts the vast majority of residential mortgages in this country, among many other things. Having said that, we still have WAY too much debt even after the adjustment, just not as much as it appears. Now, I know what you’re thinking: “If the Fed’s been doing that since time immemorial then the stats over time are comparable.” This is incorrect because securitizations only really came into vogue during the 1980s and then grew like wildfire to where they are today. So, prior to the 1990s the Fed’s debt figures are reasonably accurate; today they’re way off. I have discussed this with a Fed economist and his response, after checking into it (he didn’t even know about the double-counting), was: “Yeah, we don’t know when or if that will ever get corrected.” My response was, “Well, congratulations on a job… done.”

Now, to the larger issue… GDP is essentially an income statement item. Total debt is a balance sheet item. So, merely comparing how large an income statement item (which is not cumulative by nature) is at Year X with a balance sheet item (which IS cumulative) at Year X doesn’t prove your point. Instead what you’d need to do is add up EACH year’s GDP and then compare it to the cumulative amount of debt (using the correct figure, of course) that had built up. (I’m too lazy to do this, but in my head I can see that you’re going to reach a very different conclusion.)

Yes, debt has been growing at a much faster rate than GDP, so we know that it has had a positive impact on GDP (in the past). Now we’re at the point where debt is so large that it has a negative impact on GDP (too much to service). We have too much debt – there’s no question about that. But… you’re dramatically overstating your case when you suggest that there hasn’t been ANY economic growth ex-debt over the last 30 years; this is empirically incorrect. In fact, there’s been a bit of research done on this subject and most of it concludes that about 50-100 bps of annual GDP growth over the last 30 years has been the result of incremental debt.

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